Tesla's Pricing Power Will Suffer Due To New IRS Rules For EV Sales Credit, Analyst Says

Tesla, Inc. TSLA shares recovered from their lowest level in more than two years this week, but an analyst at Guggenheim Securities said the company’s fundamental issues are far from over.

The Tesla Analyst: Analyst Ali Faghri reiterated a Neutral rating on Tesla shares.

The Tesla Thesis: An IRS announcement on Thursday regarding the U.S. vehicles that would qualify for the electric vehicle sales credits under the Inflation Reduction Act, or IRA, is negative for Tesla, analyst Faghri said in a note.

The IRS has deemed the Model Y price IRA eligibility to be $55,000 for the five-seater version and $80,000 for the seven-seater version, the analyst noted. Going by the assumption that the vast majority of the U.S. Model Y sales are skewed toward the five-seater option, only 10-20% of Tesla’s U.S. vehicles will qualify for IRA EV sales credits in 2023, he added.

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"In summary, Tesla will lose some expected pricing power on its most profitable platform in FY23 and beyond, in our view, and we believe this increases the likelihood that TSLA will need to reduce prices in the U.S.," Faghri said.

At least some of the price cuts implemented in December should remain in place into 2023, he added.

Tesla could cut Model 3 prices, as it is just 5% above the price cap, the analyst said. He, however, noted that the Model Y, 5-seater price has to be cut unrealistically to qualify for the incentives, with the cheapest model now about 17% above the cap.

With the modest price cut, the Model 3 LR would be an extremely compelling value, Faghri said.

Gugghenheim lowered its 2022 and 2023 estimates to reflect the updated IRS guidance, along with further China demand softening trends and price cuts embedded in all regions.

The risk/reward, the analyst said, is skewed to the downside in the near term, as 2023 consensus estimates are lowered and investors recalibrate for a lower medium- to long-term growth outlook.

Tesla Price Action: Tesla closed Friday’s session at $123.18, up 1.12%, according to Benzinga Pro data

Read next: Tesla Will Further Dominate EV Market In 2023, Says Analyst — Why He Is Slashing Price Target By 24%

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